Self-Preferencing in E-Commerce Marketplaces: The Role of Sponsored Advertising and Private Labels

Traditionally, e-commerce marketplaces have enabled third-party sellers to sell to potential consumers and have earned commission from the sales. In recent years, e-commerce platforms have begun to leverage private label and sponsored advertising to generate additional revenue. Using a game-theoretic model, we examine when and why a platform may seek to give preference to its private label in sponsored advertising, and its impact on consumers and third-party sellers. Our analysis shows that self-preferencing hurts consumers even though in equilibrium the platform offers the private label at a price lower than the price of third-party sellers. Furthermore, such self-preferencing by the platform can improve the profits of some third-party sellers. We also find that it is not always optimal for the platform to self-preference its private label in sponsored advertising, particularly when advertising significantly increases demand. Moreover, the private label and sponsored advertising function as complements improving the platform's profits.